Fed Day on this May Day

Tom Gentile

Posted in
Newsletter

By: Tom Gentile
May 8th, 2024

5 mins read

Originally published via our newsletter previously. Subscribe for early access!

May 1 is May Day. It has long been celebrated as the midway point between the spring equinox and the summer solstice. May Day is also known as International Workers’ Day, a holiday supporting labor organizing and workers’ rights.

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The FOMC’s decision on interest rates was to again leave them unchanged.

Today’s decision of no action was expected, which made today’s focus that of what the Fed had to say on their outlook for the country’s rate policy from here. Were they going to offer any dialogue that was different than their recent stance on keeping rates ‘higher for longer’?

They didn’t. Higher for longer it is as of now.

The one item the markets seemed to like is their plan starting June 1 to start up what’s called ‘quantitative tightening’ – this is where they slow the pace at which they allow maturing bond proceeds to roll off its balance sheet without reinvesting them.


Market in Focus: SPY – SPDR S&P 500 ETF Trust

SPY Breaking the 10-day SMA

Simple Moving Averages can be used to idenify trends.

They can also be used as support and resitance areas.

Just as much as a security can test a SMA as resistance or support, when they get broken, where a security breaks above or below one, they can signal a potential reversal or continuation of a trend.

During Fed Chair Powell’s discussion after he and the FOMC announced No Change to interest rates the market seemed to be taking his talk and mention of quantatative tightening as a means to get long. The bullishness was very short lived as the marekts sold off from intra day highs, (which looked like it was going to regain its losses of the day prior), but instead closed below the 10-day SMA.  Could be a bearish ‘tell’ things may trade lower still.


From the Desk of a CMT – Trading the Trend

Last week, charts for SPY and 11 sector ETF’s were reviewed to identify ones that were trending (defined as ADX above 20 and rising) and what was the trend (bullish if +DI>-DI and bearish if -DI>+DI). SPY, XLRE, and XLV were highlighted as trending and all three were bearish. Additionally, it seems the charts were dated 4/22/2024 rather than 4/23/2024 so there may have been an extra chart day from the time the article was written to the point you could take market action.

As mentioned last week, the preference was XLV because the 200-day EMA presented a target for a potential profitable exit and that’s a hack I need for my trading (clear line that doesn’t move around a lot). This case study is an XLV bearish option position with figure 1 providing the daily chart view on 4/22/2024.

XLV with EMAs (20, 50, & 200), ADX with +DI, -DI (14, 20), and ROC (14, 7) on 4/22/2024
Figure 1: XLV with EMAs (20, 50, & 200), ADX with +DI, -DI (14, 20), and ROC (14, 7) on 4/22/2024

The set-up was waiting for a move to the 20-day EMA to see if it successfully served as resistance.

Walking forward on the chart we see this occurred on 4/24/2024 and the next day there was an early opportunity to enter a position. 

The chart for implied volatility (IV) on 4/25/2024 follows. One challenge is IV at the open on 4/25 likely looked a bit more like the close on 4/24 rather than the close on 4/25.

Since this is a case study that must rely on closing data, we’ll use the close 4/25/2024 which included a spike higher for 7–30-day ATM IV.

Although other ranges for ATM IV also spiked higher, 70-30 days to expiration should benefit from time decay right away. 

This means a short premium position such as a bear call spread. The last figure in the series provides the May 17th near the money call option data for 4/25/2024. 

Since the chart data may be difficult to read, note the following approximate levels:

  1. 50-day EMA at 142
  2. 200-day EMA at 138
XLV w/EMAs (20, 50, & 200), ADX with +DI, -DI (14, 20), and ROC (14, 7) on 4/25/2024
Figure 2: XLV w/EMAs (20, 50, & 200), ADX with +DI, -DI (14, 20), and ROC (14, 7) on 4/25/2024
XLV 7–30-day ATM IV on 4/25/2024
Figure 3: XLV 7–30-day ATM IV on 4/25/2024

Note there is a wide bid-ask spread for the options post-close, so the mid-price is the most appropriate to use for the case study.

The last figure provides risk data for the spread selected.

XLV Option Chain Data, May Monthly
Figure 4: XLV Option Chain Data, May Monthly
Case Study Details
Figure 5: Case Study Details

The spread is as follows:
Buy Calls to Open, 4 May 17 144 Call
Sell Calls to Open, 4 May 17 142 Call
Each spread provides a $0.36 credit for a net credit of $144
The risk is $2.00 – 0.36 = $1.64 per spread, or $656

The exit rules for the case study are as follows (exit the next day):

  • Exit half the position after a close above the 20-day EMA
  • Exit half the position after a close above the 50-day EMA
  • Exit the full position after a close below the 200-day EMA

Since moving average move, get specific with price too:

  • Exit the full position after a close above 142 (expected loss)
  • Exit the full position after a close below 138 (expected profit)

Timed exit:

  • Exit the full position by May 16th, the day before expiration

Max Risk @ $500:

  • Exit if the spread value moves to $1.61 

The final chart displays XLV on 4/30/2024, the ETF is slightly higher, the downward trend initiated in late March is weakening, and -DI is moving downward. With more than two weeks to expiration, XLV will do what it will do and along the way, there are clear actions to take to close out the case study. Nice not to have to think about tomorrow’s Fed day with a good plan in place.

XLV with EMAs (20, 50, & 200), ADX with +DI, -DI (14, 20), and ROC (14, 7) on 4/30/2024
Figure 6: XLV with EMAs (20, 50, & 200), ADX with +DI, -DI (14, 20), and ROC (14, 7) on 4/30/2024

Regards,
Clare White, CMT


Thanks, Clare!

Tom Gentile
C1P: Chief 1-Percenter


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